dollar arrow pointing up
The Asian Friday session was a good day for the US Dollar as it gained ground vs. the Yen, Euro, and a bunch of exotic currencies.
The reason for this rise is the Federal Reserves’ announcement that it is raising the discount rate hike by 25 basis points from 0.5% to 0.75%.
The discount interest rate is the rate by which banks can borrow money from the central bank. This move actually tells to the banks that they need to find non-government sources to borrow money from. This also signifies the FED’s desire to slowly extricate itself from its heavy involvement in the market and its belief that the market is now ready for such a withdrawal.
The Discount Interest Rate was initially slashed to help maintain liquidity in the market when fears of financial collapse were rampant. The fact that the FED now believes that such liquidity can exist with a higher rate shows that the central bank of the US believes financial recovery is real and is happening.
Traders around the world have taken this as a further sign that the day in which the FED further raises the long term interest rates in the US is not far.
Actually, this is something which I anticipated in my Forex prediction for 2010 where I wrote that the US interest rates are likely to rise in 2010. A stronger interest rate means a stronger dollar. This is why the USD gained so much early today. I believe this trend may continue as the US seems to continue recovering and Japan and Europe seem to be in a big mess still.
